"Economics is a study of mankind in the ordinary business of life"
-Alfred Marshall, 19th-Century Economist
The study of Economics is based on several key principles, or axioms. These principles will come up again and again, as they are a defining feature in economic theory. For this reason, it is important to learn these, and understand them well. Without further ado, let's begin our journey into the world of Economics.
Resources are Scarce
In our world, almost no resource is unlimited. There is only so much oil that can be pulled out of the ground, only a finite amount of any good can ever be brought to market, even water is proving to scarcer than many are comfortable with. Even time is scarce in that we all only have finite time on this Earth.
Because of this, people and societies face tradeoffs between how they can use their scarce resources. For instance, if a manufacturing factory were to choose to put all of their machinery towards creating a good A, they would have no machines left to produce good B with. This causes the manufacturing factory to face a tradeoff; a situation in which one must choose between two or more incompatible possibilities as to how to best use scarce resources.Scarce resources and tradeoffs are important in creating the Possibilities Production Frontier.
In deciding which tradeoff will maximize gain, economic agents (consumers, firms, governments, etc.) must account for opportunity costs, the cost of foregoing an alternative when choosing a set of tradeoffs. For instance, the above manufacturing factory faced the opportunity cost of foregoing the potential gain from creating good B (such as through revenue from selling the good or benefiting from it in other means) by choosing to use its resources solely to create good A.
The total cost of something is equal to what you give up to get it; also known as the opportunity cost
This point can confuse some people. Many, when they are first introduced to the concept of opportunity cost, don't realize the full scope of the term. Opportunity cost involves all of what we must give up to get something. This includes the purchasing power, often in the form of money, that we must give up to purchase something. This forfeits us the opportunity to buy something else with that money.
Economic Agents Respond to Incentives
This is based around the idea that people desire to do things which benefit them while avoiding things that hurt them. For instance, entrepreneurs often open business to both avoid having to work under stifling management and also for the possibility of making large amounts of money.
Businesses and governments can influence the behavior of economic agents by either creating incentives, such as a sale at a retail store, or disincentives, such as a large tax on tobacco products to make them more expensive. You can find examples of this everyday. In fact, much of economic policy-making involves either incentivizing or disincentivizing groups of people from performing certain actions.